WHO’S BEHIND THE COLLAPSE OF THE AMERICAN MIDDLE CLASS?

That wages for typical U.S. workers have been stagnant since the mid-1970s is not breaking news to anyone who has paid attention, nor is the rise of wealth and income inequality that makes us the most unequal country in the so-called “developed world.”

Forbes reported last month, “Five years after the financial crisis sent the fortunes of many in the U.S. and around the world tumbling, the wealthiest as a group have finally gained back all that they lost. The 400 wealthiest Americans are worth just over $2 trillion, roughly equivalent to the GDP of Russia.” Such reports have gained more attention since the Occupy movement drove the concept of the “1%” into the national consciousness.

Lawrence Mishel of the Economic Policy Institute says “A key to understanding this growth of income inequality—and the disappointing increases in workers’ wages and compensation and middle-class incomes—is understanding the divergence of pay and productivity.” [see chart]

But what was it that detached productivity from wages in the 1970s? What started a trend that has continued pretty much unabated through all the booms and busts of the past five decades? That’s the major theme of Who Stole the American Dream?, a new book by Hedrick Smith, the Pulitzer Prize-winning journalist who toured New Hampshire last week. With a pace that might have made observers wonder if he’s running for president (he’s not), Smith spoke at three college campuses, one high school, the NH AFL-CIO, the office of the NH Democratic Party, and community groups in Exeter and Amherst. He also appeared on NHPR’s “The Exchange,” recorded an interview with Manchester Community TV, and joined me for an interview on WNHN-FM.

Smith told an audience that packed the Peterborough Unitarian Universalist Church that he set out to write a book on “the American dream at risk.” That was until he did his research and concluded that the concentration of wealth and power in the hands of a wealthy elite was more extreme than he had realized.

Smith attributes the beginning of the “bosses’ revolt” to an obscure memo written by Lewis Powell in 1971. At the time the future Supreme Court Justice was a well-connected corporate lawyer, worried that the “the American economic system is under broad attack.”

“Powell’s intention was to spark a full-scale political rebellion by America’s corporate leaders … to change the political and policy mainstream in Washington and to put the nation on a new track, a track more favorable to business,” Smith writes in the opening chapter.

“The over-riding first need is for businessmen to recognize that the ultimate issue may be survival – survival of what we call the free enterprise system, and all that this means for the strength and prosperity of America and the freedom of our people,” Powell warned the US Chamber of Commerce, the body that commissioned his paper. His prescription gave particular attention to the mood on college campuses and the need for business to take charge of the intellectual environment, but above all called for business leaders to “be far more aggressive than in the past.”

Business responded. “After having kept government at arm’s length, the business community massively expanded its physical presence in the nation’s capital,” Smith writes. “In a few short years, more than 2000 companies set up Washington offices. The number leapt from 175 in 1971 to 2445 a decade later.” Leaders of the biggest corporations formed The Business Roundtable, the heaviest of the heavyweight business lobbies. New think tanks, notably Heritage and Cato, sprang to life, and the American Enterprise Institute ballooned in size and influence. The National Federation of Independent Businesses, the most powerful advocate for small business groups, grew from 300 members in 1970 to 600,000 in 1979.

“By the late 1970s,” writes Smith, “business interests had mustered such a huge force that they outnumbered Congress 130 to 1. They had 130 lobbyists and advocates for each of the 535 members of Congress.”

Big business flexed its muscles big time during the 1977-78 Congressional session. The business lobby took on Ralph Nader’s consumer movement and defeated the proposal to create a consumer safety agency. They went head to head with organized labor and defeated plans for labor law reform. They pushed for de-regulation of transportation, a new bankruptcy law that kept corporate leaders at the reigns of companies they had driven into debt, laid the groundwork for the decline of the defined benefit pension plan, and most important, won cuts in corporate and capital gains taxes. The new tax law “gave the economic benefits of tax law primarily to the economic elites that were now exercising increased economic power,” says Smith.

One aspect of this development is especially worth noting: the revolt of the bosses began in part as a reaction to moves by President Richard Nixon, who Powell thought was overly sensitive to public pressure. And the first big wins for the new business lobby came when Jimmy Carter was president and Democrats controlled both houses of Congress. Ronald Reagan carried the Powell prescription forward, but it was already gaining bi-partisan momentum when Reagan gained the White House.

Hedrick Smith’s strongest chapters are in the sections called “Dismantling the Dream,” “Unequal Democracy,” and “Middle Class Squeeze.” With a blend of stories from downwardly mobile middle class workers and solid descriptions of the specific policies promoted by the business lobby, Smith provides ample details to explain why the bosses are winning.

For example, he describes how Dirk Van Dongen, President of the National Association of Wholesaler Distributors, led the backroom lobbying that enabled George W. Bush and Karl Rove to push through another round of massive tax cuts benefitting the rich. Despite public opposition, Van Dongen and his Gang of Six – the US Chamber of Commerce, Business Roundtable, National Association of Manufacturers, National Federation of Independent Business, National Restaurant Association, and Van Dongen’s Association of Wholesalers – organized thousands of CEOs, district by district, to lobby for the tax cut. “With a full court press by the Gang of Six reinforcing the White House push, the Bush tax bill, offering $1.35 trillion in tax cuts over a decade, passed the House by 240 – 154 in May 2001.” The bill then cleared the Senate 58 – 33.

“When economists did the numbers,” Smith writes, “they found that 52.5 percent of the Bush tax cuts went to the richest 5 percent of U.S. households.” When joined with the off-budget trillions for the wars in Iraq and Afghanistan, the tax cuts are the major contributor to the federal deficit that has right-wingers calling for cuts in Social Security and Medicare.

Who Stole the American Dream also gives great descriptions of the shift from defined benefit pensions to largely self-funded 401-k plans, and the resulting insecure retirement faced by the baby boom generation. In addition, the book has a good chapter on the housing bubble and sub-prime banking crisis that touched off the 2007 financial meltdown. It details Wal-Mart’s decision to outsource production to China and the ripples this has sent through the US job market. Smith also describes the outsourcing of knowledge-sector jobs to China and India. Given that these are the jobs we were told would replace blue collar manufacturing, the implications are stark.

That NAFTA is not mentioned at all and the World Trade Organization is mentioned only as a body that might help the U.S. improve its trade relations with China leads me to wonder what Smith thinks of the approach to global commerce brought to us by the same corporate lobbyists. Likewise, I wonder how he sizes up the impact of Paul Volcker’s tight money policies during the Carter years. Attention to the link between race and poverty would have provided valuable depth to Smith’s analysis. But those quibbles aside, Hedrick Smith has answered his own question; we can read who stole the American dream and how they did it.

Smith confessed at a couple of talks that as a journalist he was somewhat reluctant to offer a prescription for middle class resurgence. “Changing America’s direction will not be easy,” he writes at the beginning of his concluding section. “It will happen only if there is a populist, grassroots surge demanding it, like the mass movements of the 1960s and 1970s.” That’s hard to argue with.

Instead of a bold plan to reverse the agenda foisted on the country by Lewis Powell, Dirk Van Dongen, and their legions of corporate lobbyists, Smith offers a conventional set of proposals to rebuild the infrastructure, rebuild American manufacturing, cut military spending, and protect the safety net. Those are all admirable objectives, but Smith then states that progress is being held back by “partisan extremists,” as if the Left somehow shares responsibility with the Right for the rise of plutocracy.

Instead of a resurgent Left, Smith calls for a resurgent “center.” Step 9 in his ten- point plan is “to regenerate the centrist core of American politics both by rejecting extremist candidates in both parties and by opening up our political process in every state to give more influence to moderate and independent voters.”

This left me confused. Smith understands and states clearly that “Democrats have been dragged toward the right by the gravitational pull of the Republican Right.” That means the “center,” a function of political geometry, has moved right as well. That’s the wrong place to look for inspiration and answers. Throngs chanting, “What do we want? Moderation! When do we want it? Now!” won’t worry Dirk Van Dongen and his Gang of Six.

Writing recently in The Nation, Gar Alperovitz starts an article on “Renovating the American Dream”

Everyone knows the United States faces enormous challenges: unemployment, poverty, global warming, environmental decay—to say nothing of whole cities that have essentially been thrown away. We know the economic system is dominated by powerful corporate institutions. And we know the political system is dominated by those same institutions. Elections occur and major fiscal debates ensue, but most of the problems are only marginally affected (and often in ways that increase the burdens).

The issue is not simply that our situation is worrisome. It is that the nation’s most pressing problems are built into the structure of the system. They are not unique to the current economic slump or the result of partisan bickering, something passing in the night that will go away when we elect forward-looking leaders and pressure them to move in a different direction.

For Alperovitz, whose latest book is What Then Must We Do?, the answers come from building democratic economic institutions, such as worker-owned enterprises, state-owned banks, and a state-by-state transition to a single-payer health insurance system. When combined with active resistance to plutocracy, that route is promising.

Alongside his plea for a resurgent “center,” Hedrick Smith also calls for a mass uprising against the plutocrats,

“an army of volunteers prepared to battle for the common cause of reclaiming the American Dream. Occupy Wall Street and its spin-offs in more than fifteen cities around the country began that process, focusing more of the national dialogue on the hyper-concentration of wealth and power in America – the costly divide of gross inequality between the top 1 percent and the other 99 percent. But for significant long-term impact, either Occupy will need to mature or some new movement will need to emerge with broader participation, better organization, more clearly articulated goals, and specific policy targets.”